Why Do Entrepreneurs Ignore the Poor Risk-Return Trade-offs of Private Equity Investing?
Research by Tobias J. Moskowitz Many entrepreneurs invest substantial amounts of money in their own privately held companies. Recent research suggests that such investment strategies result in a much less attractive risk-return trade-off than investing in publicly traded stocks. Ask a random sampling of observers to describe entrepreneurs, and their responses might very well include words such as “innovative,” “enterprising,” and “adventuresome.” Few people would describe entrepreneurs as “poorly diversified investors.” However, this description may be more accurate than one would expect. In the recent study “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?,” Tobias J. Moskowitz, an associate professor at the University of Chicago Graduate School of Business, and Annette Vissing-Jørgensen of Northwestern University’s Kellogg School of Management, find that most U.S. household investment in private equity is centered in privately held firms in which the househ
